Natural gas outlook: Spot prices fall to lowest since 1999

Averaging $2.18 per million British thermal units (MMBtu) in March, natural gas spot prices at the Henry Hub were at their lowest level since 1999. In the past few weeks, spot prices have traded below $2.00 per MMBtu, and NYMEX futures prices have been slightly above the spot prices. This month’s STEO reduces the average price outlook for 2012 to $2.51 per MMBtu, a downward revision from the 2012 average price outlook of $3.17 per MMBtu expected in last month’s STEO. Henry Hub prices have been on an overall downward trend since summer 2011, and March 2012 prices (as reported by Natural Gas Intelligence) declined on 16 of 22 trading days to end the month at $2.00 per MMBtu.

The average 2012 Henry Hub price represents a decline of $1.49 per MMBtu from the average 2011 price; similar declines also are expected for residential, commercial, and industrial prices, as well as for the price of natural gas delivered to electric power plants. Prices have fallen so far this year as a result of increased production and abundant supplies, coupled with reduced winter demand for natural gas due to warm weather, leading to record storage levels by the season’s end.

Overview:

(For the Week Ending Wednesday, April 11, 2012)

With continued mild April temperatures and the fourth week of net storage injections in 2012, natural gas prices dropped again this week. The Henry Hub price closed at $1.91 per MMBtu on April 11, down 15 cents for the week.

At the New York Mercantile Exchange (NYMEX), the May 2012 natural gas contract fell 15.7 cents per MMBtu for the week to close at $1.984 per MMBtu on April 11.

The natural gas rotary rig count, as reported by Baker Hughes Incorporated a day early on April 5 due to the Good Friday holiday, decreased by 11 to 647 active units. Meanwhile, oil-directed rigs increased by 11 to 1,329 units, resuming the divergence between the two drilling objectives.

Prices:

Movement in the Henry Hub day-ahead price reflected a widespread decrease in market prices in this week’s cash market by falling 7.3 percent, from $2.06 per MMBtu the previous Wednesday to $1.91 per MMBtu yesterday. As the Spot Prices tab on the left shows, the Henry Hub cash price began its descent last Thursday at $1.98 per MMBtu and hit its low yesterday. In the same period, numerous other spot market pricing points also began dropping below the $2.00 mark.

At the NYMEX, the May 2012 contract fell from $2.141 per MMBtu last Wednesday to $1.984 per MMBtu yesterday, a decrease of 15.7 cents (7.3 percent). The May 2012 contract led the downturn in the futures market over the week and dipped below $2.00 for the first time in 10 years. The 3-Month Strip (average of May-June-July contracts) also reflected the price decline with a 15.9 cent loss for the week.

Nearly all downstream trading locations registered lower prices as mild weather loads continued this week. Spot prices at Transcontinental Pipeline’s Zone 6 trading point for delivery into New York City, which started the week at $2.32 per MMBtu , showed a $0.23 per MMBtu price loss over the week (Wednesday to Wednesday) to close at $2.09 per MMBtu (down 9.9 percent). Over the same period, the Chicago citygate spot price registered an 18 cent per MMBtu price loss (from $2.20 per MMBtu last Wednesday), ending the week at $2.02 per MMBtu (down 8.2 percent).

In the midst of seasonal April temperatures throughout most of the country during the past week, total consumption decreased slightly. According to estimates from BENTEK Energy LLC (Bentek), domestic natural gas consumption fell by 0.7 percent from last week. The power sector led the decline, posting a 9.9 percent loss due to a decrease in power burn in all regions except the Pacific Northwest. However, the residential/commercial sector showed a 7.9 percent week-over-week gain, while the industrial sector registered a 1.2 percent increase.

Total supply was up slightly for the week due to a small increase in dry gas production. According to Bentek estimates, the week’s average total natural gas supply posted a 0.1 percent increase from last week’s level, led by a modest increase in dry gas production. Domestic weekly dry gas production averaged 63.9 Bcf per day, 0.3 percent higher than the previous week and 5.4 percent above this time last year. The increase in this week’s dry gas production was offset by a 2.7 percent decrease in imports from Canada, which averaged 5.1 Bcf per day over the period. Imports from Canada stand 2.0 percent below year-ago volumes for the same week. There was a 0.6 percent decrease in supply of liquefied natural gas (LNG) during the week, where sendout averaged 289 MMcf per day; however, sendout volumes remain 56.6 percent below year-ago levels.

Storage

Working gas in storage increased to 2,487 Bcf as of Friday, April 6, according to EIA’s WNGSR. This represents a net injection of 8 Bcf from the previous week. The injection this week is less than the five-year (2007-2011) average injection of 22 Bcf for the week, but slightly greater than last year’s net injection of 7 Bcf. Working inventories are currently 888 Bcf greater than their levels last year at this time and 920 Bcf greater than the five-year average.

Inventories increased in the East and West Regions and declined in the Producing Region. Inventories this report week in the East and West increased by 7 and 4 Bcf, respectively, while inventories in the Producing Region declined by 3 Bcf. Working inventories in the Producing Region declined in both salt cavern and non-salt facilities by 2 Bcf.

However, reclassifications of natural gas from working gas to base gas from one or more respondents in the Producing Region resulted in lowered working gas stocks by approximately 10 Bcf for this report week. In all three regions, inventories are well above their year-ago and five-year average levels.

Temperatures across the lower 48 States were warmer than normal, although slightly cooler than last week’s much warmer-than-normal temperatures. For the week ending April 5, temperatures in the lower 48 averaged 54.9 degrees, 5.7 degrees warmer than the 30-year normal and 4.1 degrees warmer than the same week last year. The Pacific Census Division was the only area that saw cooler-than-normal temperatures. The West North Central was warmest relative to normal, with temperatures averaging 57.7 degrees, 13.6 degrees warmer than normal and 11.6 degrees warmer than the same week last year.